Entrepreneurship Capital Spillovers at the Local Level

The paper analyses three underexplored issues in the entrepreneurship capital spillover literature, namely, its local nature, the generators and the receptors of such spillovers. For that purpose, we take advantage of the Ecuadorian census of establishments. Unlike previous evidence, we can estimate the spillovers at the establishment level, compute the entrepreneurship capital at the local level, and compare different permissiveness levels in the application of registration and tax legislation to businesses (i.e., the relative importance of the informal economy). In general, we find entrepreneurship capital spillovers at the local level. The spillover effects are lower when the entrepreneurship capital has been accumulated in informal businesses. By contrast, informal, large and more technologically developed establishments benefit more from these spillover effects. The paper discusses the implications of those findings for the design of public policies for promoting entrepreneurship.


Introduction
Public policies that promote entrepreneurship have been justified by its positive spillovers on the productivity of the other firms in the region (Acs et al. 2016). Although there is extensive evidence of entrepreneurship capital spillovers 1 , much less evidence is available on how the spillovers are produced, and therefore there is a lack of insights about how the public policies have to be developed . At the time the data were collected, Ecuador was administratively organized in 24 provinces, among which 224 cantons were distributed (see Table 1 and Graph 1 for more detailed information). The governments of the country, provinces and cantons were all elected by their inhabitants. The presence of entrepreneurship capital spillovers at the level of Eurostat 2 NUTS-3 regions or are even more aggregated (NUTS2) is well documented. However, as far we know, there is no evidence of such spillovers at the local level (formerly NUTS-5 or new LAU2). We provide evidence that establishments in cantons with more entrepreneurship capital than the other cantons of the same province are on average more productive. This evidence seems quite relevant for the justification of the local development of public policies for promoting entrepreneurship beyond those developed at superior administrative levels, in the case of Ecuador provincial or country governments.
This study analyses the spillover effects of local entrepreneurship capital in a Latin American country. A distinctive feature of Latin American countries from European or North American ones (the previously most analysed countries) is the weight of the informal economy, those economic activities partially or fully outside of government regulation and taxation. Based on our data, the informal economy represented 34.96% of the establishments in 2010. These figures are similar to estimates for other Latin American countries from previous studies (Scneider andEnste 2000 or Laporta andShleifer 2008). From a theoretical perspective, it has been suggested that the level of the informal economy is in part a consequence of political decisions .
Therefore, in order to develop public policies, it is important to know the role and weight of the informal economy in entrepreneurship capital spillovers. Public policies for promoting specific types of entrepreneurs are justified when those entrepreneurs have been identified among the main generators of spillovers. Although some efforts have been made to identify those generators of spillovers (Audretsch andKeilbach, 2004a, b, c, 2008), those efforts are mostly focused on the technological capabilities of the entrepreneurs.
The data is taken from the census of establishments in Ecuador. Data at the establishment level let us analyse the main receptors of spillovers. Those analyses open challenges in the way that public policies have to be supported. Public policies are expensive. Therefore, it can be argued that it is fair that those establishments or firms that benefit the most from entrepreneurship capital spillovers provide a higher financial support to those policies. The paper provides the first steps in the identification of entrepreneurship capital receptors. This research line is academically appealing as a way to develop theoretical arguments for explaining these differences. This paper provides a tentative explanation that combines the arguments from the KSTE and the absorptive capacity theory (Cohen and Levinthal 1990;Qian and Acs 2013). Information at the establishment level has been unusual in the previous literature. Massón-Guerra and Ortín-Ángel (2017b) argued that data at the regional level does not allow researchers to clearly distinguish when the relationship between regional GDP and entrepreneurship capital is due to spillovers or technologies with decreasing returns to scale. Therefore, data at the establishment level provides a better estimation of the entrepreneurship capital spillover than data aggregated at the regional level.
The paper is organized as follows. In Section 2, we discuss the related literature and state the hypotheses. Section 3 presents the data. Section 4 presents the production functions estimated at the establishment level. Section 5 discusses the implications and concludes the paper.

Related literature
There is a stream of literature (Audretsch and Keilbach 2004a, b, c, 2005Mueller 2006Mueller , 2007 that estimates the impacts of regional entrepreneurship capital on the production of a given region. In those studies, the regions vary from countries (Cravo et al. 2010;Stough et al. 2008;Chang 2011;Hafer 2013;Laborda et al. 2011;Mendonça and Grimpe 2015) to regions equivalent to a NUTS-3 level according to the Eurostat classification (Salas-Fumás and Sánchez-Asín 2008, 2010, 2013a. As far we know, there are no studies based on the local level, equivalent to cantons, with data aggregated at the establishment level. We adapt the methodology that is usually employed in the cited literature to the available data. In fact, the main contribution of this literature is to introduce measures of entrepreneurship capital in production functions that have been extensively estimated in other contexts (see Syverson 2011 for a further methodological discussion). Therefore, we propose the estimation of a Cobb-Douglas (1928) function where establishment j's output (Yj,i) is obtained as a combination of the inputs purchased by the establishment and other public inputs of the region i where it is placed: ln , = ln , + ln , +  ln , + ln , + ln + ln + , Then, the inputs considered at the establishment level are labour (Lj,i), (physical) capital (Kj,i), intermediate goods (Ij,i), and private knowledge (Zj,i), while inputs at the regional level are regional knowledge (Ri), regional entrepreneurship capital (Ei), and , , which captures the usual error term. The parameters to be estimated are the production elasticities with respect to labour (β), capital (), intermediate goods (ϕ), private knowledge (ρ), public regional knowledge (μ) and regional entrepreneurship capital (δ) or entrepreneurship capital spillovers, which in previous studies have usually been positive and statistically significant. The existence of such positive spillovers has been interpreted as a call to arms (Acs et al. 2016) (Acs et al. 2016). In this sense, it has been argued that big cities have better conditions than more rural areas for the generation of such entrepreneurial clusters (Acs, et al. 2011). Furthermore, there is some evidence that entrepreneurship capital spillovers are higher in more urban regions (Audretsch and Keilbach 2005). Although some empirical evidence exists about the determinants of the level of entrepreneurial activity at the city level (Audretsch and Belitski 2017;Bosma and Sternberg 2014;Barreneche 2014), there is no evidence on the entrepreneurship capital spillovers at the city or similar local levels, which is the main justification for such policies. We can provide such evidence for the case of Ecuadorian cantons by controlling for provincial dummy variables. Therefore, those spillovers are beyond those produced by other provincial inputs, thus justifying the intervention of local governments.
Hypothesis 1: The production is higher in establishments placed in cantons with more entrepreneurship capital than other cantons of the same province.
A second important issue for the development of public policies is whether they are more efficient when they foster specific kinds of entrepreneurs. For that purpose, some previous studies (Audretsch andKeilbach 2004a, b, c, 2008) sought to identify the type of entrepreneurship capital that generates more spillover effects. For example, Audretsch andKeilbach (2004a, b, c, 2008) classified entrepreneurship capital on the basis of the technological intensity of the sectors (high technology, ICTs, and other sectors). The theoretical argument behind this classification is that the newness of the knowledge used in these sectors is different. Therefore, in accordance with the KSTE, one would expect higher spillovers in regions with a higher relative presence of technological entrepreneurs. The evidence is mixed. Higher relative weights of technological sectors generated more spillover effects in Audretsch and Keilbach (2004c), while they generated less spillover effects in Audretsch andKeilbach (2004a, b, c, 2008).  highlight legal infrastructure as an important part of the public policies for promoting entrepreneurship. In their words, "State and local regulations can also affect entrepreneurship, as they do for other businesses activities. For decades, economists have argued that many forms of regulation help large businesses that can pay the fixed costs of meeting those regulations, but harm smaller firms. (...) States and localities also may wish to consider exempting smaller businesses from certain regulation" (p.20). The informal economy is the usual term for identifying businesses exempted from government taxes and regulation. The data available allow us to distinguish between formal and informal entrepreneurship capital. Although several theories have been proposed for explaining the transition from informal to formal businesses (see, for example, Bennett 2010), the empirical evidence (La Porta and Shleifer 2008;Bruhn 2011Bruhn , 2013 suggests that there is not much mobility between informal and formal businesses. The informal economy is mainly composed of entrepreneurs with very low human capital that engage in small businesses with low value added and are in the less innovative sectors (La Porta and Shleifer 2008). Therefore, one would expect less knowledge spillovers from informal establishments.
From the discussion above, we propose to test whether the entrepreneurship capital spillovers are higher in those cantons with a higher weight of technological establishments and a lower weight of informal ones.

Hypothesis 2: The effect of regional entrepreneurship capital is a) higher when it is accumulated in technological sectors and b) lower when it is accumulated in informal establishments.
A third important issue related to public policies is who provides the financial support. Some taxpayers can support the government policies without benefitting from the spillovers. Therefore, it is interesting to identify whether some sort of established business receives systematically higher entrepreneurship capital spillovers. Theoretical arguments justifying such spillover differences can be built based on the KSTE and the absorptive capacity theory. From the KSTE perspective, entrepreneurship is a facilitator of knowledge dissemination. From the absorptive capacity theory, established businesses have different levels of knowledge and capacity to accumulate further knowledge or absorptive capacities. Therefore, entrepreneurship capital spillover effects are expected to be higher in those establishments with lower current levels of knowledge and/or higher absorptive capacities. From Cohen and Levinthal (1990), several authors have related the technological intensity of the firms with their absorptive capacities.
Tentatively, we postulate that large establishments have more resources and can learn faster, while the establishments of the same size that remain informal have accumulated lower levels of knowledge and thus have more to learn. Data at the establishment level allow us to estimate the elasticities of production with respect to entrepreneurship capital for each different group of establishments. The next hypothesis summarizes the expected results:

Hypothesis 3: The benefits from entrepreneurship capital spillover effects (a) increase with the size of the establishment, (b) increase with its technological intensity, and (c) and
increase with the level of informality.
Finnaly, Audretsch andKeilbach (2004a, c, 2008) suggest that the entrepreneurship capital may be correlated with the production function error term in Equation (1). Therefore, the estimation of the entrepreneurship capital spillovers can suffer from an endogeneity problem. This seems quite reasonable when it is estimated with aggregated data. Those regions with higher production can also be the ones producing more entrepreneurs. Data at the establishment level seems to alleviate these problems. Nonetheless, we provide simultaneous estimations of the determinants of the establishments' production, Equation (1), and the determinants of the cities' entrepreneurial capital, Equation (2): where are the usual error terms and are the parameters to be estimated. As much as possible, we consider x similar determinants than the ones highlighted by the previous literature that

Data
We use data from the Censo Nacional Económico 3 (CENEC). This is a census of the establishments in all 224 cantons of Ecuador from between September and November of 2010.
The objective was to identify and collect information about all (visible) establishments where economic activity is conducted out and is physically separated from a home. Therefore, the census includes formal and informal establishments. Due to that, it is not based on the fulfilment of any regulations or tax payments. For this study, we excluded public and government establishments (10.310) and mining and oil extraction establishments (87). The census does not include those establishments that have a head office in the same canton. However, we have identified and omitted some establishments in which this is the case (55.278). We ended up with 445.490 establishments.
We identify the canton (i) and province where the establishments are placed, and therefore introduce fixed effects for provinces and cantons. Due to the lack of establishments, two cantons were omitted (El Piedrero y Las Golondrinas), leaving 222 cantons in the sample (see Table 1 for further details).
We use the following information regarding each establishment. The CENEC provides information about the economic activities of the establishments (two-digit NACE codes). Following the Organization for Economic Cooperation and Development (OECD) and EUROSTAT 4 , we identify a set of NACE two-digit sectors as technological businesses. See governmental statistical office 6 (INEC) considers an establishment as an informal one when it is not included in the Registro Único de Contribuyentes and has fewer than 100 workers. Using these criteria, we classify each establishment as either formal or informal. The dummy variable DInformal j,i takes a value of 1 when the establishment belongs to the informal economy.
For each canton (i = 1,…, 222), we have collected the following information.
The cantons' knowledge is measured by the investments in R&D activities and training. We differentiate among the Regional Public Knowledge (accumulated by public and government establishments 7 , ) from the Regional Private Knowledge (accumulated by the rest of The descriptive statistics are presented in Table 3. The correlations between variables are in Table   4. Table 5 shows different estimations of Equation (1). The differences between the columns or models are the additional variables included. In the best case, the increase in the explanatory power of the model R 2 is 0.0236. As an indicator of the collinearity magnitude, we use the variance inflator factor (VIF). In all cases, the values are below 10, which is the usual maximum acceptable level.

Results
Model 1 is the basic model. Much of the coefficients are output elasticities that indicate the percentage change of the production associated with a 1% increase in the input amount. The elasticity of production with respect to labour () is 0.7376, the elasticity with respect to capital (α) is 0.1656, the elasticity with respect to current capital (ϕ) is 0.2190, the elasticity of production with respect to private knowledge (ρ) is 0.0587. All of these coefficients are statistically significant at the 1% level. The values of those elasticities are quite stable among the different Models, except when interactions are included, see Model 4. Model 1 also includes Provincial fixed effects (i.e., we control for all the public inputs at the province level). The inclusion of these 24 dummies is associated with an R 2 increase of 0.0054.
Model 2 is estimated for testing Hypotheses 1 and 2. In this case, we present a three-stage simultaneous estimation of Equations (1) and (2). Regarding Equation (1), we add the basic variables related to the KTSE theory, the regional knowledge, the entrepreneurship capital and its composition. The coefficient associated with the regional entrepreneurship capital is 0.1937, which is positive and statistically significant at the 1% level, which supports Hypothesis 1. There are entrepreneurship capital spillovers at the cantonal level after controlling for the public inputs at the provincial level. We also find that the elasticity of production with respect to the cities' knowledge generated by public institutions is 0.0017, while knowledge generated by private institutions is 0.0026; both elasticities are positive and statistically significant at the usual levels.
With respect to Hypothesis 2, we find that the establishments in cantons with higher weights of informal and technological establishments have lower production. The estimated elasticities are respectively -0.0549 and -0.0261, and only the first one is statistically significant. Therefore, we only find support for Hypothesis 2b; informal businesses generate fewer spillovers.
Regarding the determinants of entrepreneurship capital, we find that all the estimated elasticities in Equation (2) are positive and statistically significant. Therefore, ceteris paribus, those cantons that are wealthier, have denser populations and have higher tax pressures have higher levels of entrepreneurship capital. (1) cantons' fixed effects. This implies an increase of 0.0036 in the R 2 , which can be interpreted as the importance of the omitted cantonal inputs. For testing Hypothesis 3, we add interaction terms between the entrepreneurship capital and the establishments' size, its technological intensity, and its formalization level. The results are presented in Model 4. The elasticity of production with respect to the entrepreneurship capital is 0.1282 and 0.0814 points higher in technological and formal establishments than in nontechnological and informal ones, respectively. Take note that in this specification, the elasticity of production with respect to labour depends on the entrepreneurship capital of the canton. For example, when this is evaluated at the average value of the entrepreneurship capital (-3.4060), the elasticity is 0.7080, being 0.8257 when there is an increase of one standard deviation (0.3515) in the entrepreneurship capital. All the coefficients are statistically significant at the 1% level. These results support Hypothesis 3; larger, more technological and more informal establishments benefit more from the spillover effects of regional entrepreneurship capital. Furthermore, ceteris paribus, low technological and informal establishments have on average 25.84% and 20.81% less production than technological and formal establishments, respectively.

Conclusions
This paper provides evidence related to the local existence of entrepreneurship capital spillovers and the characteristics of entrepreneurs that generate and benefit more from those spillovers.
These are important issues for the design and development of public policies to promote entrepreneurship.
Data about the entrepreneurship capital of 222 Ecuadorian cantons show that the spillovers are a local phenomenon. The evidence seems consistent with the KSTE arguments. Personal contacts between the staffs of different firms help to disseminate knowledge and those contacts are mostly produced at the local level. Therefore, important spillovers are produced at the local level. Our evidence confirms this, but we need further evidence to extend the results to other geographic areas and for a better understanding of their determinants. Meanwhile, the evidence provided in this study suggests that the development and implementation of public policies to promote entrepreneurship is in part a responsibility of the local authorities.
A second piece of evidence is related to the kind of establishments that generate more spillovers.
The evidence comes from a Latin American country, an institutional environment scarcely analysed until now, in which the informal economy plays an important role. It has been argued ) that the laxity in business regulation is a political decision. Therefore, it is important to know its implications. The evidence shows that in those cantons with higher weights of informal establishments, the entrepreneurship capital spillovers are lower. The kind of businesses developed by the informal economy seem to be those that generate lower spillovers.
Further evidence is needed to confirm those results in other contexts. Furthermore, we also test whether the relative importance of technological firms in a canton increases or decreases the entrepreneurship capital spillovers. Although we found a negative effect, it is not statistically significant. Therefore, the debate about the importance of technological firms as a higher source of spillovers remains open.
Finally, the use of data at the establishment also provided a third piece of evidence related to the type of firms that benefited the most from the entrepreneurship capital spillover effects. From our analyses, we detect that technological, large and informal establishments receive the most benefits from such spillover effects. The evidence can be interpreted to mean that technological and large firms have, on average, higher absorptive capacities (Cohen and Levinthal 1990;Qian and Acs 2013), while informal firms have more to learn. Further studies using data at the establishment level are needed to confirm such relationships and identify whether some type of firms systematically benefit from entrepreneurship capital spillovers.
This research has limitations. This study uses cross-sectional data, which makes it difficult to address endogeneity and causality problems. The data come from a specific country and institutional setting, so we cannot guarantee its generality. The data do not allow for the determination of how these spillover effects are produced and consequently the sources of such spillover effects. Further evidence could help to overcome these limitations.      In the table below, the entrepreneurship capital is measured by the average of the last three year's ratios between the start-ups per inhabitant of each city. -25 -